Fair Values of Financial Instruments

12 Months Ended

Jan. 01, 2017

12.	Fair Values of Financial Instruments

GAAP requires assets and liabilities carried at fair value to be classified and disclosed in one of the following categories:

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Level 1: Quoted market prices in active markets for identical assets or liabilities.

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Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

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Level 3: Unobservable inputs that are not corroborated by market data.

The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments. There were no transfers of assets or liabilities between Levels in any period presented.

Financial Instrument	Fair Value Level	Method and Assumptions
Deferred compensation plan assets and liabilities	Level 1	The fair values of the Company's non-qualified deferred compensation plan for certain executives and other highly compensated employees has associated assets and liabilities, which are held in mutual funds and are based on the quoted market value of the securities held within the mutual funds.
Commodity hedging agreements	Level 2	The fair values for the Company’s commodity hedging agreements are based on current settlement values at each balance sheet date. The fair values of the commodity hedging agreements at each balance sheet date represent the estimated amounts the Company would have received or paid upon termination of these agreements. Credit risk related to the derivative financial instruments is managed by requiring high standards for its counterparties and periodic settlements. The Company considers nonperformance risk in determining the fair value of derivative financial instruments.
Public debt securities	Level 2	The fair values of the Company’s public debt securities are based on estimated current market prices.
Non-public variable rate debt	Level 2	The carrying amounts of the Company’s variable rate borrowings approximate their fair values due to variable interest rates with short reset periods.
Acquisition related contingent consideration	Level 3	The fair values of acquisition related contingent consideration are based on internal forecasts and the weighted average cost of capital (“WACC”) derived from market data.

The following tables summarize, by assets and liabilities, the carrying amounts and fair values by level of the Company’s deferred compensation plan, commodity hedging agreements, debt and acquisition related contingent consideration.

	January 1, 2017
	Carrying		Total		Fair Value		Fair Value		Fair Value
(in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Deferred compensation plan assets	$	24,903	$	24,903	$	24,903	$	-	$	-
Commodity hedging agreements		1,289		1,289		-		1,289		-
Liabilities:
Deferred compensation plan liabilities		24,903		24,903		24,903		-		-
Public debt securities		456,032		475,800		-		475,800		-
Non-public variable rate debt		451,222		452,000		-		452,000		-
Acquisition related contingent consideration		253,437		253,437		-		-		253,437

	January 3, 2016
	Carrying		Total		Fair Value		Fair Value		Fair Value
(in thousands)	Amount		Fair Value		Level 1		Level 2		Level 3
Assets:
Deferred compensation plan assets	$	20,755	$	20,755	$	20,755	$	-	$	-
Commodity hedging agreements		3		3		-		3		-
Liabilities:
Deferred compensation plan liabilities		20,755		20,755		20,755		-		-
Commodity hedging agreements		3,442		3,442		-		3,442		-
Public debt securities		619,628		645,400		-		645,400		-
Acquisition related contingent consideration		136,570		136,570		-		-		136,570

Under the CBAs the Company entered into in 2016, 2015 and 2014, the Company will make a quarterly sub-bottling payment to CCR on a continuing basis for the grant of exclusive rights to distribute, promote, market and sell specified covered beverages and beverage products in the acquired territories. This acquisition related contingent consideration is valued using a probability weighted discounted cash flow model based on internal forecasts and the WACC derived from market data, which are considered Level 3 inputs. Each reporting period, the Company adjusts its contingent consideration liability related to the territory expansion to fair value by discounting future expected sub-bottling payments required under the CBAs using the Company’s estimated WACC. These future expected sub-bottling payments extend through the life of the related distribution assets acquired in each expansion territory, which is generally 40 years. As a result, the fair value of the acquisition related contingent consideration liability is impacted by the Company’s WACC, management’s estimate of the amounts that will be paid in the future under the CBAs, and current sub-bottling payments (all Level 3 inputs). Changes in any of these Level 3 inputs, particularly the underlying risk-free interest rate used to estimate the Company’s WACC, could result in material changes to the fair value of the acquisition related contingent consideration and could materially impact the amount of noncash expense (or income) recorded each reporting period.

The acquisition related contingent consideration is the Company’s only Level 3 asset or liability. A reconciliation of the activity is as follows:

	Fiscal Year
(in thousands)	2016			2015
Opening balance	$	136,570		$	46,850
Increase due to acquisitions		133,857			109,784
Decrease due to measurement period adjustments		-			(18,396	)
Payment/current payables		(15,080	)		(5,244	)
Fair value adjustment - (income) expense		(1,910	)		3,576
Ending balance	$	253,437		$	136,570

The Company recorded a favorable fair value adjustment to the contingent consideration liability of $1.9 million during 2016 and an unfavorable fair value adjustment to the contingent consideration liability of $3.6 million during 2015. All adjustments to fair value were primarily a result of updated projections and changes in the risk-free interest rate. These adjustments were recorded in other income (expense) on the Company’s Consolidated Statements of Operations.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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